Monday, January 9, 2012

Baxter International Inc: $BAX cash flow valuation update

Current Price: ~ $50/share
Projected Yield: ~ 2.67%




Baxter International focuses on delivering injectable therapies for a wide variety of medical conditions. The firm's BioScience segment specializes in developing treatments for disorders such as hemophilia and immune deficiencies. It also provides a variety of medication delivery systems including intravenous bags, solutions, and other devices to control fluid inflow, including dialysis equipment and solutions for patients with kidney failure.   


I estimated the firm's WACC today at 6.18% using the Capital Asset Pricing Model and the company's recent SEC filings.

Recent free cash flows and noted growth rates:

Year
FCF $Millions
2001
362
2002
345
2003
636
2004
822
2005
1106
2006
1657
2007
1613
2008
1561
2009
1895
2010
2040
TTM
1953

Average Annual Growth FCF: ~ 24%
CAGR FCF: ~ 21%
Consensus Forecast Industry 5-Year Growth: ~ 16% per year
Consensus Forecast Company 5-Year Growth: ~ 10% per year

Scenario 1
The company's FCF through 9 months ending 9/30/2011 is $1282 million; $1709 million annualized.  Starting at $1709 million FCF, assuming the company achieves a 5-year growth rate in FCF of 10% per year, and assuming that after the next five years, the company achieves no growth in FCF or 0% growth per year forever:

Discounted Cash Flow Valuation
Year
FCF $Millions
0
1709
1
1880
2
2068
3
2275
4
2502
5
2752
Terminal Value
48980

The firm's future cash flows, discounted at a WACC of 6.18%, give a present value for the entire firm (Debt + Equity) of $45802 million. If the firm's fair value of debt is estimated at $5600 million, then the fair value of the firm's equity could be $40202 million.  $40202 million / 564 million outstanding shares is approximately $71 per share and a 20% margin of safety is $57/share.


Scenario 2
All else being equal and assuming the company achieves a 5-year growth rate in FCF of 8% per year, then after the next 5 years, no growth in FCF or 0% growth per year forever:

Discounted Cash Flow Valuation
Year
FCF $Millions
0
1709
1
1846
2
1993
3
2153
4
2325
5
2511
Terminal Value
43874

The firm's future cash flows, discounted at a WACC of 6.18%, give a present value for the entire firm (Debt + Equity) of $41500 million. If the firm's fair value of debt is estimated at $5600 million, then the fair value of the firm's equity could be $35900 million.  $35900 million / 564 million outstanding shares is approximately $64 per share and a 20% margin of safety is $51/share.


Sources
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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